SCRA: How S.C. Created Its Own Company

December 10, 2010

Investigative Reports

Print Friendly, PDF & Email

The NerveIn 1983, the Internet was still a secretive Defense Department computer networking project and the first cell phone – weighing in at 2 pounds and nicknamed “the brick” – was still several months away from hitting the market.

Hydrogen conjured images of bombs rather than fuel cells, and the term “knowledge economy” was mostly a theoretical concept reserved to academia.

IPods did not exist, nor did iPads, PDAs or PDFs.

However, the Research Triangle Park in North Carolina already was up and running, and well on its way toward anchoring the renowned Research Triangle of science- and technology-based economic development in the Tar Heel State.

To the southwest, meanwhile, the Georgia Institute of Technology was fully functioning, too, with an even longer record of research, commercialization and other activities related to knowledge-based economic development.

But here in South Carolina, there was no comparable entity or organization.

Witnessing what was happening in North Carolina and Georgia, a group of powerful state officials here wanted in on the government-driven, knowledge-based economic development game in which the Palmetto State’s neighbors had long been engaged.

Thus, amid the dawning of home computers, the General Assembly under then-Gov. Richard Riley passed legislation creating the S.C. Research Authority (SCRA).

“I have a little bit of instinct for why it was done,” says Jim Stritzinger, the first president of SC Launch, a Research Authority affiliate the SCRA created in 2006 to help implement part of its legislative mandate.

Stritzinger says a big part of the thinking behind the SCRA was “to offset the competitive economics that North Carolina and Georgia were posing,” because “South Carolina was felt to be left behind.”

Austrian-born business management guru Peter Drucker popularized the term “knowledge-based economy.” It refers to a system in which information is the main commodity, rather than agricultural, manufacturing or other goods.

The 1983 legislation spells out the Research Authority’s mission toward that end:

“The SCRA (authority) is organized to enhance the research capabilities of the state’s public and private universities, to establish a continuing forum to foster greater dialogue throughout the research community within the state, and to promote the development of high technology industries and research facilities in South Carolina,” the statute says.

The SCRA’s enabling legislation is detailed in Title 13, Chapter 17 of the S.C. Code of Laws.

To get the Research Authority up and running, upon its creation the state gave the entity $500,000 and about 1,400 undeveloped acres. At that time, more than 25 years ago, the land was estimated to be worth about $10.7 million, according to a 2005 review of the SCRA by the state Legislative Audit Council.

Since it was created, the SCRA has not received any additional line-item appropriations in the state budget, Stritzinger says. “It has functioned on its own,” he says.

But the SCRA does receive other kinds of taxpayer support.

For one thing, the Research Authority is exempt from income, sales and property taxes under its enabling legislation. Indeed, the law leaves no doubt as to the nature of the SCRA:

“It is found and declared that the project authorized by this chapter is in all respects for the benefit of all the people of the state, for the improvement of their welfare and material prosperity, and is a public purpose and a corporation owned completely by the people of the state,” the code says.

In essence, the Research Authority is a state-created and controlled technology and real estate company.

The SCRA specializes in applying research to commercial uses. But for the most part, the SCRA does not perform such technical work itself.

Rather, the Research Authority acts much like a general contractor. It wins bids on projects, many of them from federal agencies and the U.S. military, and brings subcontractors and other partners together to execute the work necessary to fulfill its contracts.

The SCRA has three divisions:

  • A public sector in the form of SC Launch, which awards grants as seed capital to start-up technology firms. The grants are funded by state dollars via tax credits, another example of public support for the Research Authority.
  • A federal sector under another SCRA affiliate called Advanced Technology International. ATI deals primarily in military contracts and brings home the lion’s share of Research Authority revenue.
  • Stemming mostly from its land grants, the SCRA also has a large real estate component, centered mainly on developing and leasing research facilities.

SCRA AND THE KNOWLEDGE ECONOMY

In addition, the SCRA is the central player in efforts by state government and South Carolina’s major publicly supported research universities, as well as the City of Columbia and other local jurisdictions, to develop a knowledge-based economy in the state.

As it follows, if you believe that it is proper for government to actively steer market forces in shaping the economy, you might love the SCRA.

If not, you might loathe it.

What does the head of the state’s largest business group think of the Research Authority?

“I’d rather not comment on it,” says Otis Rawl, president and CEO of the South Carolina Chamber of Commerce. “Good, bad or indifferent, I’d just rather not comment at all.”

Operating with a public charter in the private sector, the SCRA falls into gray areas with respect to disclosing information under state and federal Freedom of Information laws. That, on occasion, raises questions about the Research Authority’s level of transparency.

Generally, the organization has been responsive to requests from The Nerve for information, whether pursuant to the S.C. Freedom of Information Act or just in the form of basic questions.

But because the SCRA deals with a lot of proprietary contractual information, the Research Authority guards those matters closely, shrouding much of its internal work from public disclosure.

For example, at a Nov. 17 SCRA board meeting in Charleston, the board retreated into executive session twice.

During the first behind-closed-doors session the board reviewed the SCRA’s business development initiatives. “This in the hands of a competitor would be very valuable information,” board member Albert Baciocco, a retired Navy vice admiral, asserted in calling for the private discussion.

Going forward, matters such as SCRA’s transparency could become more important, as the Research Authority’s role in South Carolina’s economy seems positioned to only grow.

Much of the Research Authority’s revenue comes from contract management fees, and its bottom line has increased substantially in the past several years to record highs.

The SCRA reported more than $170 million in revenue for fiscal year 2010, a jump of about 60 percent from $108 million in 2009. In 2008 the number was $110 million; in 2007, $94 million.

http://s7.addthis.com/static/r07/sh39.html

“SCRA is experiencing a period of rapid acceleration in company growth, technical deliveries and economic development success,” says the Research Authority’s 2010 annual report.

In announcing the SCRA’s 2008 revenue total, Research Authority CEO Bill Mahoney said, “We continue to compete successfully and globally in high quality, applied research and commercialization services markets, as well as meet or exceed our knowledge-based economic development mandates in South Carolina.”

That assertion, however, could prove to be debatable upon drilling into the Research Authority’s contracts.

On its website, the SCRA touts a $13.7 billion total economic impact since its inception. And, in a Sept. 23 interview with The Nerve, Mahoney said studies by the Moore School of Business at the University of South Carolina put the Research Authority’s job creation total at 15,000.

But when asked whether most of the contract work the SCRA farms out goes to South Carolina firms, Mahoney responded, “The answer to that is ‘no.’” Only a minority percentage of Research Authority contracts are awarded in-state, he said.

Does that fact mesh with the SCRA’s legislative charter to benefit “all the people of the state, for the improvement of their welfare and material prosperity?”

It’s an open question.

On an organizational level, the SCRA employs scores of highly paid business and technical executives.

Mahoney’s salary, not including any bonus pay, is $237,100.

Among some 240 Research Authority employees overall, more than 100 earn salaries exceeding $50,000, according to the state salary database. Ten SCRA employees take home more than $150,000 annually; 26 are paid $100,000 to $142,000; and 32 make $75,000 to $99,000.

As The Nerve recently reported, nearly 100 Research Authority employees are receiving raises of as much as 9 percent this fiscal year. In a public meeting in September, Mahoney initially couched the raises as 6.5 percent across the board. Then, in an Oct. 4 letter to employees, he said the pay hikes could be larger and would be targeted to 97 workers.

http://opendata.socrata.com/w/zn6s-e7fw/y34g-bnf3?cur=m6_bq15JElv&from=root

Meanwhile, the SCRA retains one of the most potent, politically connected lobbying and law firms in South Carolina – Nelson Mullins – and operates intimately in the loftiest circles of power in state government and higher education in South Carolina.

Beyond the overarching mission of the Research Authority, the enabling legislation lays out specific objectives for the SCRA. Those include duties to:

  • “Advance the general welfare of the people”;
  • Increase employment opportunities for South Carolinians;
  • “Develop the human, economic, and productive resources of South Carolina”;
  • “Promote and encourage expansion of the research and development sector, with emphasis on capital formation and investments … in South Carolina”; and
  • “Foster the perception of South Carolina as an international leader in the idea generation and the development, testing, and implementation of new advances in science and technology.”

To help accomplish these goals, the law envisions a partnership among the Research Authority, the state’s colleges and universities, and business and industry.

The SCRA’s role in the partnership is to promote cooperative research between higher education and the private sector, and to help the state’s colleges and universities attract “nationally prominent academic researchers and professors.”

HARRELL DIVES IN

Of late, the Research Authority’s mission to assist higher education has gained prominence courtesy of the General Assembly and one of its most prominent members in particular.

Although the SCRA has existed for more than a quarter of a century, its role and profile have been elevated in recent years by, perhaps more than any other state official, S.C. House Speaker Bobby Harrell, R-Charleston.

Since he became speaker in 2005, Harrell has championed the knowledge economy and sponsored legislation designed to bring it to fruition in South Carolina.

In one example, Harrell was chief sponsor of the Industry Partners Act of 2006, which led to the creation of the SCRA affiliate SC Launch.

Among other things, the Industry Partners Act established the Industry Partners Fund. That fund provides the working capital seed grants to new technology companies. Money for the fund comes from donations from corporate contributors and the like.

But it’s not just good-hearted charity driving the Industry Partners Fund. In fact, when it all comes out in wash, it’s actually state tax coffers that are underwriting the fund, because donations to it are good for a 100 percent, dollar-for-dollar credit against state taxes.

In July 2008, for instance, the Anderson Independent Mail reported that BlueCross BlueShield of South Carolina had “directed $2 million of its state income tax” to the fund.

Therefore, instead of that $2 million going to the state to pay for troopers and teachers and so forth, it instead went toward grant-making activity in the anything but sure-fire realm of technology-related entrepreneurialism.

Contributions to the fund are capped at $6 million per year, according to Mahoney.

Under the Industry Partners Act, the Research Authority is responsible for administering the fund. But because of questions as to whether it would violate the S.C. Constitution for an agent of the state to engage in equity investment activity, the SCRA created a separate entity to do that – SC Launch.

For all intents and purposes though, SC Launch functions independently of the Research Authority only in strictly legal, arms-length terms. Besides SCRA identifying SC Launch as an affiliate, the Research Authority board appoints three members of the seven-member SC Launch board.

Stritzinger, the first president of SC Launch, is a fan of SCRA. He says SC Launch exemplifies many benefits the Research Authority yields for the state’s economy.

“I think there are a lot of great things that SCRA has done,” he says. “I don’t necessarily see it as a bad thing. I think that it could do more than it is now, but compared to other state agencies, SCRA has done some pretty cool things.”

These days, Stritzinger maintains close ties to the Research Authority. An experienced knowledge economy executive, he now manages the Columbia location of Immedion, a Greenville-based data services company.

As it happens, Immedion’s hub in the Capital City is located in one of three SCRA Innovation Centers. Built and financed by the Research Authority, the centers lease operating space to venture technology businesses.

Each Innovation Center is linked to one of the state’s three major research universities – the Columbia site to USC; a Charleston location to the Medical University of South Carolina; and, under construction in the Upstate, an Anderson center to Clemson.

The facilities are an outgrowth of the 2005 Innovation Centers Act, another Harrell bill, and serve as perhaps the most tangible evidence of the depth to which USC, MUSC and Clemson are vested in trying to develop a knowledge economy in the Palmetto State.

A grand scheme to pull it off, known as “the pyramid,” provides another indicator.

In a July 2008 news conference at the state’s unemployment agency, Harrell and other legislative leaders along with business executives unveiled a full-on schematic aimed at making the knowledge economy happen in South Carolina.

(In an ironic twist, that was during a time when the agency, then named the S.C. Employment Security Commission, was mismanaging the state’s unemployment insurance fund into hundreds of millions of dollars of debt to the federal government, as documented in a Legislative Audit Council report earlier this year.)

‘THE PYRAMID’

The Pyramid
http://d1.scribdassets.com/ScribdViewer.swf

Dubbed the “South Carolina Knowledge Economy Strategic Framework,” the economic development plan depicts a layered pyramid featuring higher education institutions, economic development entities and state agencies.

The executive committee of the SCRA board sits atop the pyramid underneath “Ultimate Outcome: High-Paying Jobs.”

The executive committee consists of seven members who constitute the real power behind the board.

Those seven individuals are the Research Authority board chairman (Bill Masters); the presidents of Clemson (James Barker), USC-Columbia (Harris Pastides) and MUSC (Raymond Greenberg); and one designee each of the governor and the House Ways and Means and Senate Finance Committee chairmen.

“The executive committee has all powers and authority of the board of trustees,” the SCRA enabling legislation says. “The board shall have an advisory role only and shall advise the executive committee of the actions recommended by the board.”

Masters describes the executive committee as a “shadow board.” Masters was appointed chairman by Gov. Mark Sanford in the spring of 2009. He previously had served on the SC Launch board.

Sanford has opposed many of the Legislature’s efforts to subsidize economic development, knowledge based or otherwise, and his choice of Masters to head the Research Authority board was no accident.

Said Sanford spokesman Ben Fox in an e-mail to The Nerve, “The governor appointed Mr. Masters to the SCRA board because he is a successful businessman with an outsider perspective; he had experience with SCRA through his work on the SC Launch board; and perhaps most importantly, because he brought to the table a willingness to ask the tough questions – something that has become increasingly important as the state faces intense challenges both fiscally and economically.”

Masters’ question-asking went over with fellow SCRA board members and senior Research Authority management like a bug in the matrix. “I wouldn’t say total opposition, but extremely strong opposition,” he told The Nerve, “and it makes no difference what I ask.”

Harrell was none too pleased, either. So, he sponsored a state budget proviso to rescind the governor’s power to appoint the SCRA board chairman. The General Assembly passed the proviso toward the end of the 2009 legislative session, but the measure did not survive a veto by Sanford.

“It was getting viral very quickly,” Masters recalls. “So, I started off with guns blazing.”

Other state officials who sit on the SCRA board round out the public face of Research Authority governance. Those officials include the state secretary of commerce and the chairman of the S.C. Commission on Higher Education.

SCRA board members from the business world include Mary Lou Sigsby, a manager with the North American division of Michelin, and Larry Wilson, a partner in the FirstMark venture capital firm who once led the former Policy Management Systems Corp.

In conjunction with the July 2008 news conference for the unveiling of the pyramid plan, the state Chamber of Commerce issued a release saying the economic development blueprint “was formulated by the collective efforts from legislative leaders, the South Carolina Research Authority (SCRA), our state’s research universities and private sector leaders.”

The release says Harrell and fellow Republicans Senate President Pro Tempore Glenn McConnell of Charleston, Ways and Means Chairman Dan Cooper of Anderson and Senate Finance Chairman Hugh Leatherman of Florence explained the plan “in a letter sent to economic development contributors all over our state.”

Summarizing the pyramid blueprint, the statement says, “The plan for South Carolina’s future economic success breaks down our state’s current economic structure and identifies the primary forces driving each sector. The strategy for economic growth and job creation relies on a mutual effort to expand those current sectors with a focus on growing our budding knowledge-based economy.”

To that end, one of the initial steps in the plan called for the SCRA to create a “knowledge sector council” to coordinate efforts toward achieving the goals of the framework, according to the chamber’s news release.

If “knowledge sector council” seems a bit nebulous, the practical reality of how the SCRA operates is no less murky and complicated.

A Bloomberg Businessweek “company overview” lists the Research Authority as a “noncommercial research organization” and “real estate agents & managers.”

Research Authority CEO Mahoney describes the SCRA as a private company with a public mission. And to those who argue that government should operate more like a business, Mahoney responds, “We are a business.”

A government-run business?

In some respects, yes, and if that causes you to do a double-take, you’re probably not alone.

To be sure, South Carolina has a long history of doing things its own way. If Fort Sumter 1861 isn’t enough evidence, consider the Budget and Control Board, a hybrid of the executive and legislative branches of state government that is unique to South Carolina.

Likewise, the Research Authority would seem to be one of a kind.

“We’re a unique kind of organization,” Mahoney says.

Seeking a national perspective on the SCRA, The Nerve provided the United States Chamber of Commerce with one of this news site’s previous stories about the Research Authority and asked the U.S. Chamber for its perspective on the SCRA vis-à-vis the private sector, and whether anything like it exists elsewhere in the country.

The chamber’s senior manager of media relations, Bryan Goettel, responded in an email: “I have looked into your request and talked with several people here in the building, but there does not appear to be anyone that is familiar with the Research Authority or that can speak to your request.”

Reach Ward at (803) 254-4411 or eric@thenerve.org.